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August 26, 2020

KingsCrowd Startup Rating Methodology

Background

KingsCrowd started in 2018 with a mission. We want to enable everyone to make informed decisions in startup investing. We aggregate, research, analyze, and rate all companies raising capital on 50+ online private equity markets, from pre-seed to pre-IPO.

With our numerical ratings, we try to be as objective as possible. We collect data on the company’s team, market, financials, traction, and competitors. Then we compare all companies that are actively raising to each other. The end result is a number between 1 (lowest score) and 5 (highest score). 

For later stage companies, ratings depend mainly on the company’s financial performance. But for earlier stage companies, there might not be any revenue yet. Rating an early stage company was and still is a challenge. That’s why angel investing and venture capital is both a science and an art. 

With our Staff Pick ratings, we conduct our own research on a company to develop an “opinion.” The end result is one of the following tags: Top Deal, Deal To Watch, Neutral, or Underweight

Disclaimer: KingsCrowd’s numerical and Staff Picks ratings should not be considered as investment recommendations. KingsCrowd is not a fund, an asset manager, or a financial advisor. We provide information to aid investors who are making their own investment decisions. 

Ratings Philosophy 

We understand that it’s very hard to judge innovative startups in their early stages. Many top investors have passed on companies that turned out to be industry leaders. Many have also funded companies that failed quickly. What we’re trying to do is give investors some tools to make more informed decisions.  

To rate companies we considered two approaches: comparing startups to an ideal startup (a benchmark) or comparing existing startups to each other. 

The first approach raises important questions. What defines an ideal startup? Is it the valuation or the valuation growth? Is it the revenue or the revenue growth? Or is it the user growth rate? Is it the team? We can also ask what is considered “Good” for any of the above metrics for different kinds of companies and for different industries. 

How often do we see ideal startups? Did all successful companies show signs of success from day one, or did they learn and innovate over time to build their competitive advantages? Moreover, what’s considered ideal now might become average as market dynamics change and as companies innovate to grow faster and break records. 

Instead of trying to define the ideal startup in every industry, we decided to go with the second approach. We compare all available companies to each other. We think this is a more fair comparison in an ever-evolving world of innovation. With this approach, top performers can now rise up and be noticed by investors. 

We understand that this approach raises its own set of questions. A major point we have considered is that if all available companies are bad, then some of those will still receive high scores because they are marginally better than their peers. That can be true. However, we think it is very rare for all raising companies to be low-quality. We believe that the advantages of this approach outweigh the disadvantages. 

Another result of this approach is that the ratings of one company can vary from week to week. Every week, we add new companies and remove those who closed their funding rounds. This changes the ratings for those still active. 

As of today, all companies are compared to each other regardless of their industries or business models. We needed to start this way because we have a small sample size. On average there are 300 active companies in any given week. As online equity crowdfunding gets more popular, we can start branching out into industry specific groups so that we compare apples to apples. 

For now, we focus on the most common aspects of a company at the early stage, and we try to reduce the effect of industry differences. 

It’s worth noting that our Staff Picks rating scheme is totally separate from our Numerical Ratings. Some companies might look good on paper in comparison to others. But there could be some aspect of the startup that didn’t seem strong or viable to us. When that happens, we won’t consider them as Top Deals or Deals To Watch

The Five Metrics

For every company we rate, we collect more than 100 data points. We draw from a startup’s listing page on the crowdfunding platform, their pitch decks, financials, and performance metrics. 

We also pull information from companies’ SEC filings, their websites and blogs, news and reviews written about the companies or their products/services, and other public data sources. In addition, we conduct our own standardized market sizing to get a better understanding of their potential.

We focus on five main metrics:

  • Price: We compare the valuation of a company at the current round to the valuations of all other companies raising at the same time and at the same company stage. If the round is raised on a convertible note or a simple agreement for future equity (SAFE) we compare the valuation cap and discount rates. Companies with higher valuations get lower scores.

In the future, we will add more details to the Price rating — such as industry-specific revenue multiples compared to others in the same industry and valuation growth over time. 

  • Market: We conduct our own standard market sizing research to estimate the addressable and obtainable markets as well as the market growth rates. Companies with bigger market sizes or faster growing markets get higher scores for this metric.
  • Differentiation: To come up with the differentiation score, we consider all of the following: number of direct competitors, whether the company’s product/service comes with a higher quality and lower price compared to its competitors, patents, barriers to entry, social impact, and business partnerships.
  • Performance: For performance, we consider the company’s current phase. Is it pre-launch, pre-revenue, pre-profit, or profitable? We also consider the number of users, number of paying customers, total annual revenue, monthly burn rates, and other financial metrics.
  • Team: For the team, we take a deep look at the founders and other key members. We consider years of relevant industry experience for the founders and the size of their network. We check to see if they have previous successful exits. The founders’ level of education (and where that education was attained) is also taken into account. To get an idea of team cohesion, we look at whether the founders have worked together previously and whether they have complementary skill sets. Beyond the founders, we consider the number of relevant advisors and notable investors. Lastly, we examine the diversity of the team as a whole.

Ratings Methodology

For every data point, we calculate the percentile values for all active companies at an increment of 5. Then we rank those values. Finally, we apply a min-max scaler to convert the ranks to scores between 1 and 5. 

As an example, let’s assume we’re rating Annual Revenue. Let’s also assume that in a given week there are 300 active companies. The maximum revenue among all active companies in this scenario is $30M and the minimum is zero. The percentile values for this example are as shown in the chart below.

Based on the chart above, any company that has a revenue above $4.3M will be among the highest 5% of all companies revenues and will get a score of 5 for its revenue rating. 

Any company that has a revenue between $2.2M – $4.3M will be between the 90th and the 95th percentile. Thus it would get a score of 4.8 for its revenue rating. 

Overall Rating

The final overall rating of a company is calculated by taking the average of the Price, Market, Differentiation, Performance, and Team ratings. That average also goes through the same process of calculating percentile values and scaling. The end result is a positively skewed distribution as shown below: 

More Information

For more information (and to provide feedback) on our ratings methodology please contact KingsCrowd customer services at support@kingscrowd.com.


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